ArcelorMittal Poised for Growth Medium Term, Fighting Raw Material Cost Increases Short Term

Managing a multi-national like ArcelorMittal certainly has its challenges, we tend to use that phrase multi-national rather loosely nowadays to label any firm with operations overseas but strictly speaking it is a firm that has subsidiaries in two or more countries. It is in part a measure of complexity and it doesn’t get much more complex than ArcelorMittal listed in New York, Amsterdam, Paris, Brussels, Luxembourg and Spain with operations in 60 countries and 300,000 employees. As demand and prices slumped in late 2008/early 2009 the group saw revenues nearly halve to $65.1bn in 2009 from $124.9bn in 2008. Net income slumped in 2009 from $9.39bn in 2008 to just $118m and Lakshmi Mittal said when ArcelorMittal’s latest results were published that 2010 will be “challenging”. The firm sees the prices of raw materials increasing this year iron ore, coal and energy prices. In an interview with the Telegraph newspaper Lakshmi Mittal is quoted as saying, “We are concerned about this cost increase. ArcelorMittal has a strategy to invest more on vertical integration over the medium term. That means we should be more self-sufficient on our own captive supplies. We are making some progress in iron ore but we are not making much progress on coal self-sufficiency. Today, we’re about 50 to 60% self-sufficient in iron ore but for coal it is only about 15 to 20%. The group clearly needs more vertical integration, even some of those it thought secure like its Kumba reserves in South Africa are now the subject of a legal challenge. So on the supply side the group is looking to secure raw material supplies.

On the demand side stagnant or slow growth in mature markets such as Europe or North America where AM has much of its capacity will not deliver the growth the firm needs to meet shareholder expectations. The growth is coming from emerging economies such as China, India, Brazil and the Middle East. So although, on the one hand, battling dramatically rising raw material costs that threaten to push the group into the red the firm is simultaneously positioning itself to invest in these growing markets with varying degrees of success. In Brazil it is already the country’s largest steel maker and wants to construct further steel plants. In India AM has experienced similar problems to other foreign owned and even some domestic steel mills in gaining both mining and development rights to the large tracks of land necessary for mines and plant construction but the firm now seems confident that one or more of its current applications will move forward in Q2. That’s just as well because Mittal was clear in a recent interview that he saw India as a major development opportunity for the group, citing a strong middle class, the need for and intent to develop extensive infrastructure investment and a young demographic as reasons why India would be a very important market, not just for steel but for all products in the future.

China of course dwarfs even India but as Mittal is quoted as saying, “There are thousands of steel companies in China, producing anything from 50,000 to 5m tons a year. China wants to have the top 10 companies producing 50% of China’s volumes. I hope that will happen soon because it will create a system for the steel industry. But they don’t allow foreign companies to hold majority shares yet.” – ArcelorMittal is a minority shareholder with stakes of less than 35% in two Chinese steel companies but is currently not permitted to take majority control of local production, which must be a frustrating position for the world’s largest steel maker in the world’s largest steel market.

–Stuart Burns

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